CPI and PPI Inflation: A Closer Look
The stock market opened slightly higher today, buoyed by another round of encouraging inflation data. US producer prices, often a precursor to where consumer prices might be heading, rose by just 0.1% month-over-month in July, a figure that came in lower than economist forecasts. Over the year, the Producer Price Index (PPI) increased by 2.2%, hovering near the Federal Reserve's (Fed) 2% inflation target. This PPI data was a prelude to the day's much-anticipated Consumer Price Index (CPI) report.
The Labor Department's July CPI report indicated a slight cooling of inflation, which was mainly in line with market expectations and helped to maintain investor optimism about future Fed rate cuts. The CPI climbed 0.2% compared to June. Core CPI, which removes the more volatile food and energy prices, also increased by 0.2%. Both figures were in line with the analyst's forecast.
Year-over-year, CPI inflation stood at 2.9%, slightly below the expected 3% and lower than June. Core inflation, at 3.2%, marked its lowest point since 2021, aligning with analyst forecasts and dipping slightly from June's 3.3%.
These reports collectively offer market analysts a clearer picture of the Fed's preferred inflation measure, the core PCE price index, which derives approximately 70% of its inputs from the CPI and 30% from the PPI.
Fed Rate Cut Odds and Market Reactions
Source: CMEGroup Fedwatch Tool
Following the CPI inflation data, market expectations for a September Fed rate cut have shifted slightly. The probability of a 50-basis-point cut now stands at 37.5%, compared to 62.5% for a 25-basis-point reduction. Before the release of the CPI data, investors saw a 53.0% chance of a half-point cut.
Fed Chair Jerome Powell will deliver a key policy address at the annual Jackson Hole symposium next week. The investment community eagerly anticipates any hints regarding the timing and magnitude of future rate cuts.
The Fed's benchmark interest rate has remained at a 23-year high, exceeding 5%, as the central bank waits for inflation to recede. This has placed a financial strain on consumers, who have had to contend with high inflation and elevated interest rates, making essentials like homes, cars, and other goods less affordable.
Mounting pressure on the Fed to cut rates has been compounded by recent stock market volatility, with some attributing the turbulence to the central bank's policies. Many analysts now expect the first rate cut to occur in September.
Looking Ahead: Economic Data in Focus
As the markets digest the latest inflation figures, attention is shifting to other key economic indicators, including retail sales and jobless claims, to be released tomorrow. After last week's brief market selloff, triggered by a weaker-than-expected jobs report, market participants are keen to see signs of economic resilience.
While inflation has dominated the headlines recently, rising fears of a potential recession have made other economic reports equally significant for market sentiment. As the data continues to arrive, investors will closely watch for any signs that could influence the Fed's upcoming decisions.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
The daily September S&P futures chart shows the July top before the recent 9% correction. MRCI research has found a bullish seasonal pattern (blue line) with an 87% win rate during the past 15 years. While the daily trend has turned down, the weekly and monthly charts remain bullish. Fundamentals and technicals are supporting this upcoming seasonal pattern.
Through their research, MRCI found that the S&P has closed higher (yellow box) on approximately September 07 than August 20 for 13 of the recent 15 years.
In a recent article for Barchart, "Market Meltdown or Buying Bonanza? This Stock Market Dip Could Be a Golden Opportunity," I discussed the previous seasonal pattern that could result in a buying opportunity when the market fell. And now we are approaching another seasonal window that may carry us to new market highs.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
Source: MRCI
During MRCI research, an exciting pattern occurred: Five years of the 15 never had a daily closing drawdown (a loss).
In closing…
While the recent inflation data offers some optimism for potential Fed rate cuts, the market remains on edge as crucial economic indicators unfold. With the Fed's upcoming decisions likely to shape the financial landscape, investors should stay vigilant, considering seasonal patterns and broader market conditions. As always, a balanced approach, incorporating technical, fundamental, and risk management strategies, will be crucial in navigating the uncertainties ahead.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
